The Effects of Derivatives on Firm Risk and Value
Söhnke M. Bartram
Warwick Business School - Department of Finance; New York University (NYU) - Department of Finance
Gregory W. Brown
University of North Carolina (UNC) at Chapel Hill - Finance Area
Jennifer S. Conrad
University of North Carolina Kenan-Flagler Business School
February 10, 2010
Journal of Financial and Quantitative Analysis, Vol. 46, No.4, August 2011, pp. 967-999.
Using a large sample of non-financial firms from 47 countries, we examine the effect of derivative use on firm risk and value. We control for endogeneity by matching users and nonusers on the basis of their propensity to use derivatives. We also use a new technique to estimate the effect of omitted variable bias on our inferences. We find strong evidence that the use of financial derivatives reduces both total risk and systematic risk. The effect of derivative use on firm value is positive but more sensitive to endogeneity and omitted variable concerns. However, using derivatives is associated with significantly higher value, abnormal returns, and larger profits during the economic downturn in 2001-2002, suggesting firms are hedging downside risk.
Number of Pages in PDF File: 52
Keywords: Derivatives, risk management, hedging, international finance
JEL Classification: G3, F4, F3
Date posted: February 11, 2010 ; Last revised: March 10, 2014